Why Silver Could Become the Trade of the Year

Supports appear far weaker for silver than for gold.

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Recently, some of our firm's readers have asked us to chart silver (represented by the ProShares Ultra Silver ETF (NYSEARCA:AGQ) and the ProShares Ultra Short Silver ETF (NYSEARCA:ZSL). The conclusion we draw from these charts is probably not in line with what the majority of traders expect. If the projection is correct, then silver could become the trade of the year... and could then become the trade of next year too!

As we have mentioned in several articles, most recently inAugust, we believe gold price needs to make one or possibly two lower lows before it can begin a strong and lasting rally. A decline in silver would coincide with that, but silver is contending with additional bearish elements on the charts. Therefore, the relative magnitude of a drop will probably be bigger.

The monthly chart is interesting in contrast to gold, in that silver has dropped under the 2008 high. This rules out the idea that silver could be in a fourth wave as part of a larger multi-year advance. (It doesn't necessarily rule out the possibility of an advance; it just means we aren't seeing a corrective fourth wave.)

Another difference between the silver and gold charts is that silver doesn't fit within the same kind of large, upward-sloping channel that we see with gold.

As an aside, it's worth considering whether the breach of the 2008 high in silver portends a similar breakdown in gold. We will have to wait and see. Currently that isn't part of our primary scenario for gold.

On the monthly chart for silver futures, the target area is the zone between 14.20 and 11.93, but any new low along the middle of the channel would meet the minimum requirements for a low. As price approaches the midline channel support, we will examine the structure down from the end of August to assess pattern completion.

We have attached Elliott wave labels to the weekly chart, and you can see that the pattern from the 2008 high is similar to our count on the weekly gold chart. The most recent swing high at the end of August looks like a completed fourth wave, followed by the start of a fifth wave down to finish the downward impulse from October 2012 and possibly finish a large 3-3-5 structure down from the April 2011 high.

Shorter-term supports/targets are listed on the chart. The two lower targets will probably be the most significant ones, but that will be determined by the speed of the move.

In a slightly different idea, creating an ending diagonal into the end of the year or into early 2014 would be an alternative to a straightforward move down, and it could represent a way to resolve the conflicting directions of the two dominant cycles on the weekly timeframe. We have posted a chart for the alternate path on our website.